Robinson Crusoe and Man Friday lived on a remote island, with RC owning the only arable land and MF owning the only orchard. They established a monetary system of rare pebbles to facilitate trade. Over the years, through trade and property transactions, they both accumulated assets worth 500 pebbles each. A tsunami then deposited rare pebbles on the island, stimulating further property transactions. However, yields later declined as each specialized in the wrong industries. They raised prices and traded less. In conclusion, the story demonstrates benefits of trade but also that specialization and innovation are needed for long-term prosperity.

1. A Two Person Closed Economy
Illustration of key macroeconomic principles
Property boom, benefits from trade and
inflation

2. On a lonely island in the middle of
nowhere

3. Lived two men
Robinson Crusoe (RC) and Man Friday (MF)

4. RC owned the only piece of
arable land on the island

5. And MF owned the only
orchard there

6. Every year, RC gave MF some grains and MF gave RC
some fruits & vegetables

7. It worked well for
years but one fine
day, RC developed
an appreciation for
fresh fruits and
vegetables which
were a rarity for
him unlike MF

8. Sadly MF had no
use for grains mid-
season.
RC and MF sat
together and
agreed on a
monetary measure
to facilitate mid-
season transactions

9. They gathered all
the pebbles of a
rare kind on the
island (100) and
split them equally
between them. The
pebbles were to be
used as the money
for exchange.
50 50

10. Now RC freely took
fruits & vegetables
from MF around
the year
They exchanged
goods worth 40
pebbles each year

11. RC being the smart
Alex he was,
figured that he may
purchase a small
portion of the
orchard for the 10
pebbles that were
always in spare

12. So he bought a
tenth of the
orchard from MF
for 10 pebbles

13. MF was very happy
that year for he had
20 pebbles in
reserve after
buying all the grain
he needed.
RC too was full of
joy for he now
owned a little more
than what he had.

14. Next year MF
discovered that his
reserve has
depleted to 12
pebbles only as RC
bought lesser fruits
& vegetables

15. MF requested RC
for a tenth of his
arable land for
which RC
demanded 12
pebbles – MF
readily agreed

16. RC was very happy
as he had 20
pebbles in reserve
now and owned
assets worth 120
pebbles.
MF too was quite
happy as he now
had 16 pebbles in
reserve in addition
to assets equal to
RC.

17. Next year, RC
approached MF
with a proposal to
buy a further tenth
of his orchard.
MF realizing his
folly last time,
demanded 20
pebbles this time,
which RC readily
agreed to.

18. Now RC was very
happy that he
owned assets
worth 220 pebbles.
MF was also
overflowing with
joy for he now had
36 pebbles in
reserve in addition
to assets slightly
less than RC.

19. BLACK SWAN – HELICOPTER MONEY
A tsunami struck the island that year. Fortunately
both the arable land and orchard remained safe.
MF while gaping in awe at the damage to the trees
on the seaside on which Tsunami struck discovered
to his amazement 30 rare pebbles of the same kind
he and RC were using as money.

20. MF with his coffers
over-flowing with
pebbles ran to RC
and offered to
purchase a further
tenth of the arable
land

21. RC with no great
want of pebbles
casually asked for
30 pebbles to
which MF
surprisingly (to RC)
agreed

22. RC was very happy
now for he had
assets valued at
300 pebbles along
with 30 pebbles in
reserve
MF too was
overjoyed as he
also had similarly
valued assets with
36 pebbles in
reserve

23. And so the
On that isolated Island continued

24. After a few years,
both RC and MF
owned half of
arable land and half
of orchard - assets
valued at 500
pebbles each
Their trend analysis
also suggested that
assets will continue
to rise at 20% in
value.

25. They also owned 65
pebbles each – all
in reserve.

26. In the meantime,
RC with no great
aptitude for
maintaining an
orchard saw the
production of fruit
& vegetables in his
owned part come
down to half

27. Elsewhere food-
grain yields halved
in MF owned arable
land for MF did not
know how to
properly maintain
the right mix of
manures in the soil.

28. RC suffering from
lack of fruits &
vegetables in his
diet and MF from
lack of grains
started trading
again with their
pebbles.

29. The prices they
settled at now was
3x higher than the
initial price.
They could only
afford to trade half
the initial trade
volumes now.

30. Since there was no
scope for further
improvement, they
learnt to keep them
satisfied with 75%
of the grains and
fruits & vegetables
now.

31. Yet each of them
was content that he
owns assets valued
at 500 pebbles
growing at 20%.
And he owns 65
pebbles, up from
50.
And he sells goods
worth 60 pebbles
annually, up from
40 pebbles.

32. Lessons
 Trade improves specialization
 Means of production should be managed by people
best qualified to do so
 Price rise does not equate with rise in value
 Helicopter money may stimulate investment and
consumption temporarily but cannot be a substitute
for greater specialization and technological
improvement /innovation
 It is important to decide whether to live well or to
live seemingly well, both may not necessarily be the
same depending on perspectives

33. Hope You Enjoyed It!
Coming Soon!
Part 2 – RC and MF decide to relive their life